Survey a harbinger of 'major downswing'
Business investment in Australia, dominated by the mining sector, could slip by 12 per cent this year and more than 20 per cent next year, ratings agency Standard & Poor's said in a report. Such falls would reverse the 20 per cent of growth during the past two years.
"The estimated decline in spending, if realised, would be the worst capex growth figures for Australia in the 10-year period we have data for, exceeding the downturn that followed the global financial crisis," S&P credit analyst Terry Chan said.
At the same time, global capital expenditure, which has been dependent on the energy and materials industries, appeared to be stalling before it had even started to recover, and looked to be weak over the next few years.
"Despite a modest post-financial crisis recovery, real-terms capital expenditure growth slowed in 2012 and is expected to turn negative in 2013. Early indications for 2014 are even more pessimistic, suggesting a 5 per cent contraction," Mr Chan said.
The survey of 2000 firms around the world, including Rio Tinto and BHP Billiton, came as China, Australia's largest trading partner, warned of slower growth as the central government implemented sweeping economic reforms.
Chinese Finance Minister Lou Jiwei said economic growth of 6.5 per cent would not be a "big problem", adding he was confident of 7 per cent growth this year. The economic powerhouse is set to report its second-quarter GDP data on Monday. The S&P survey of 91 Chinese companies also forecast business investment on the mainland to slide by 4 per cent this year and 6 per cent in 2014.
Mr Chan said a fall in investment by Chinese firms was reflected in the country's weaker first-quarter GDP figures. The slower growth could hit Australian exports to the country.
Business conditions and confidence have remained soft in Australia, with NAB's monthly survey for June falling to a four-year low as trading, profits and employment conditions weakened.
A drop in capital expenditure would hit Australian banks, which have continued to experience subdued personal and business lending over the past few years.
Business credit rose by 0.1 per cent in May and 0.2 per cent in April, figures released by the Reserve Bank in late June showed. Business credit grew by 0.9 per cent over the year to May.
S&P said the dominance of the energy and materials sectors in total global capital expenditure had created a "fair degree of dependency". Business investment growth lifted just 2 per cent last year and could potentially decline by 2 per cent this year.
"Downward pressure on corporate capex in Australia is a troubling harbinger in this regard, with the scale of projected decline in 2013 [and] 2014 suggesting mining and commodity companies are anticipating a major downswing."
Frequently Asked Questions about this Article…
The S&P international survey found Australian business capital expenditure could fall sharply — about a 12% slip this year and more than a 20% drop next year. S&P said such falls would reverse roughly 20% of growth recorded over the past two years and, if realised, would be the worst capex figures in the 10-year data series, exceeding the post-global financial crisis downturn.
Business investment in Australia is dominated by the mining sector, so a downturn in mining and commodity demand has an outsized impact on overall capex. S&P said the projected decline in 2013–2014 suggests mining and commodity companies are anticipating a major downswing, particularly as the commodity "super cycle" eases.
Global capital expenditure, which has been heavily dependent on the energy and materials sectors, appeared to be stalling. S&P noted real-terms capex growth slowed in 2012, was expected to turn negative in 2013, and early signs for 2014 suggested about a 5% contraction — a pattern that would weigh on Australian investment given its resource exposure.
The S&P survey of 91 Chinese companies forecast mainland business investment would slide about 4% this year and 6% in 2014. S&P linked a fall in Chinese firm investment to weaker first-quarter Chinese GDP figures — and because China is Australia’s largest trading partner, slower Chinese investment and growth could hit Australian exports.
The S&P survey covered about 2,000 firms worldwide and explicitly included large mining companies such as Rio Tinto and BHP Billiton, reflecting the survey’s focus on energy and materials exposure in global capex.
A drop in business capital expenditure would likely hit Australian banks because business capex directly influences corporate borrowing. The article notes banks have already experienced subdued personal and business lending in recent years; Reserve Bank figures showed business credit rose only 0.1% in May and 0.2% in April, and 0.9% over the year to May.
Domestic indicators were soft: NAB’s monthly business survey for June fell to a four-year low as trading, profits and employment conditions weakened, signalling deteriorating business confidence alongside the capex concerns highlighted by the S&P survey.
Watch Australian and Chinese macro and business data cited in the article: S&P capex and business investment reports, Chinese GDP releases (the article noted an upcoming second-quarter print and comments from Finance Minister Lou Jiwei), NAB business confidence and trading figures, and Reserve Bank business credit trends. Also follow commodity-cycle signals and mining-sector announcements since Australia’s capex is closely tied to energy and materials activity.
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